Keys to Personal Financial Planning - Assignment Example

Student’s Full Names Professor’s Name Finance 9th May 2012 Personal Financial Planning Hallman and Rosenbloom view personal financial planning as a form of consumerism that is applied to an individual’s or family’s personal financial affairs (2). This process has been defined as the development and implementation of entirety, coordinated plans for the achievement of one’s overall financial objectives (Hallman and Roosenbloom 3). Crumbley and Smith describe this planning process as an attitude that should become a habit (1). Financial planning involves a process of gathering information; both financial and emotional data, and preparing a future financial plan. Larry and Wendy is a married couple aged sixty and fifty-nine and earning an annual salary of $120,000 and $50,000 before tax. They have two grown up children and assets and liabilities jointly held in their names. This couple desire a financial plan that will enable them achieve their life objectives. This paper develops a financial plan to assist this couple achieve their life objectives, both short-term and long-term. Sections of the Financial Plan 1. Disclaimer 2. Summary of Financial Plan 3. Personal Information 4. Goals and Objectives 5. Cash Flow 6. Aggregated asset/liability statement 7. Asset Allocation Profile 8. Retirement 9. Life and Disability Insurance 10. Estate Planning Checklist 11. Education 12. Recommendations 1. Disclaimer Figures stated in this report are derived from the assumptions and information that the client; Larry and Wendy, have provided. Some of this information and assumptions is bound to change with time. A portion of the information presented in this report is based on the current tax and legislation which are susceptible to change. In this respect, it is imperative that the client reviews their financial plan on a regular basis to ensure it is up-to-date and addresses their present needs. Furthermore, it is important that they look at a few different situations to get an idea of the influence of the different assumptions on their planning objectives. Information provided in this report is general in perspective and should by no means be construed as availing legal, tax and/or accounting advice, even though some tax effects or rules may mention some potential legal options for purposes of education. In any case the client has any specific issues and/or questions in these areas, it is better he they seek advice from their legal accounting and/or tax advisor. Information contained in this personal financial plan should not be taken as a substitute for consultation with a qualified tax advisor or legal professional, but should only be applied in conjunction with the professional tax or legal advisor’s advice. This personal financial plan is offered as an effort to aid the client in understanding, learning, and formulating their financial basis for decision making. In this respect, this personal financial planning is availed to enhance the client’s knowledge of various topics and their ability to communicate the intricacies of the financial environment. This plan represents a comprehensive framework that clarifies and structures the client’s financial matters. This plan is based upon the confidential information the client has provided in respect to their present objectives and resources. Even though the illustrations in this plan can be helpful and valuable in the examination of the client’s finances, they do not represent the culmination of the client’s efforts in planning. The results shown in this personal financial plan should not be assumed to be a guarantee of or future performance projections. These results are only for illustrative purposes alone. This plan has forward-looking statements and no guarantee exists that these expressed views and opinions will come to pass. The historical information in this presentation only show past performance and does not in any way imply that or warrant comparable future results. The client’s real future investment returns, inflations and tax levels are not known. This presentation makes use of representative assumptions in its financial planning calculations to come up with a report for discussion and educational purposes. The assumptions and calculations within this presentation may not portray all charges, potential fees, expenses that the client may have incurred within the time frame these illustrations have covered. If they could have been included, lesser investment and less favourable results could have been arrived at. In this respect, the client is advised not to rely on the results of this report to predict their actual future market conditions, investment performance, inflation rates and tax effects. 2. Summary of Financial Plan This report makes use of financial models to avail a picture of the clients’ present financial situations and provide illustrations of the possible direction their finances may take. The future market and economic conditions are not known but are bound to change. The assumptions applied are simply a representation of market and economic conditions that could take place, and are formulated to promote a discussion of the appropriate actions that are to be taken presently or in the future to assist the client to manage and maintain his financial position under different changeable situations. Larry and Wendy’s financial plan summary is illustrated in the tables below: Net Worth   Cash Flow Assets 2,104,000 Family Income (before taxes) 170,000   Superannuation income 15,300 Liabilities 375,600 Total Expenses 123,200 Client's Net Worth 1,728,400 Client's Net Cash Flow 62,100 Table.1 Financial plan summary 3. Personal Information The personal information of this couple is provided in the table below: Personal Information     Name Larry Wendy Age 60 59 Marital Status Married Married Employer Employed Employed Dependants Have two grown-up children who live in Sydney   Table.2 Personal information 4. Goals and Objectives The short term objectives of this couple include; Plans for a ‘round the world’ cruise on Costa Darwinda Term deposits for six months of $17,000 to mature in three months Overdraft facility repayment at the rate of 15% p.a. amounting to $5,600 The long-term objectives for this couple are: Preference of investing in defensive assets due to their low risk profile Investment exposure in growth assets as well Replacement of contents in house if stolen or lost due to damage worth &157,000 Acquisition of insurance cover for the cars, health insurance, income protection insurance, life insurance Payment of mortgage at the rate of 7.21% p.a. amounting $300,000 Payment of credit card liability at the rate of 17% p.a. amounting to $20,000 Personal loan repayment for the new car at the rate of 12% p.a. amounting to $30,000 5. Cash Flow The cash flow statement will allows Larry and Wendy to know how much money they have and how their funds are allocated, and how they are working for them, and how they are assisting them in reaching their goals. In addition, this statement will indicate the following to Larry and Wendy: An ability to save and invest An ability to analyze the client’s standard of living Possibility of living within or beyond their means, and Highlight of any problem areas The cash flow of Larry and Wendy is illustrated in the table below: Larry & Wendy Cash Flow Summary Income Annual amount Percent amount Family income before tax 170,000 100% Income taxes and Source deductions (51,000) 30% Family income after tax 119,000 70% Expenses     Living expenses 83,200 68% Round the world cruise 40,000 32% Total 123,200 100% Table.3 Cash flow summary Fig.1 Expenses chart 6. Aggregated Asset/Liability Statement Larry & Wendy Aggregated Asset/Liability Statement Assets Larry Wendy Total Cash Assets 120,000 50,000 170,000 Superannuation contributions 10,800 4,500 15,300 House     1,000,000 Cars (2012 Range Rover Evoque TD4 and 1998 Honda NSX     120,000 Cash management trust     120,000 Transactional Bank Account     7,500 Managed funds     185,000 Shares     173,000 Superannuation assets 175,000 150,000 325,000 Term deposit     17,000 House and Contents     157,000 TOTAL ASSETS     2,289,800 Liabilities       Mortgage     300,000 Credit card liability     20,000 Personal loan     30,000 Overdraft facility     5,600 TOTAL LIABILITIES     355,600 NETWORTH OF CLIENT     1,934,200 Table.4 Aggregated assets/liabilities table Larry & Wendy Tax Calculations Details Larry Wendy Totals Earnings 120,000 50,000 170,000 Taxation (17,550) (4,650) (22,200) Additional Tax (14,800) (3,900) (18,700) Medicare Levy (1.5%) (1,800) (750) (2,550) Medicare Levy Surcharge (1%) (1,200) (500) (1,700) Flood Levy     (7,250) Income     117,600 Table.5 Tax calculations table 7. Asset Allocation Profile Asset allocation is designed to maximize the return on the client’s portfolio at the same time minimizing risks. This portfolio involves structuring a diversified portfolio from the broad asset classes of the client based on the income and growth needs and the client’s risk tolerance. Research on investment strategies shows that choosing among the best classes of assets has a great impact on the investment returns than the specific investment the client selects or even how well the client times the market (Darst 23). The assets of the client can be classified into four categories; bond, balanced, cash and stock as illustrated in the table below. The cash assets comprise of the cash earned and superannuation contributions; stock comprise of shares; bonds comprise of funds in the transactional account and the shares held by both Larry and Wendy; and balanced comprises of the house, the two cars, superannuation assets, term deposits, and the house contents. Larry & Wendy Asset Allocation Cash 185,300 Bonds 192,500 Stock 173,000 Balanced 1,739,000 TOTAL 2,289,800 Table.6 Asset allocation table Fig.2 Asset allocation chart From the asset allocation table and chart, Larry and Wendy are not aggressive investors given that their investment in stocks and shares only accounts for eight-percent of their total assets and incomes. Their income potential is relatively high while their volatility and growth potential is unusually low. Their asset mix from the chart above is; Cash 8%, Bonds 8%, Stock 8%, and balanced 76%. When these assets are decomposed into the areas of Australian shares, international shares, direct property, listed property, Australian fixed interest, international fixed interest and cash, results as portrayed in table.7-8 and fig.3-4 shall be obtained. Larry & Wendy Total Asset Allocation   Directly held Indirectly Held Australian Shares 5,550 18,500 74,925 166,500 International Shares 3,700   41,625   Cash 2,775   16,650   Listed Property 2,775   8,325   Direct Property:   1,247,500     House 1,000,000       Cars 120,000       Cash Management trust 120,000       Transactional bank account 7,500       Australian Fixed Interest 3,700   16,650   International Fixed Interest and Cash     8,325   TOTALS 1,266,000 1,266,000 166,500 166,500 Table.7 Total asset allocation table Fig.3 directly held assets allocation Fig.4 Indirectly held assets Works Cited Crumbley, Larry, and Murphy Smith. Keys to Personal Financial Planning. 3rd ed. Hauppauge, NY: Barron’s Educational Series. Darst, David. The Art of Asset Allocation: Principles and Investment Strategies for any Market. 2nd ed. East Windsor, NJ: McGraw-Hill, 2003. Print. Hallman, Victor, and Jerry Rosenbloom. Personal Financial Planning. 7th ed. East Windsor, NJ: McGraw-Hill, 2003. Print. 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